What is ‘economic growth’?

Economic growth is what economists and politicians talk about all the time as the ultimate goal of an economy – to produce more goods and services over time (in other words, increase GDP).

When media, the government and economists talk about the economy doing well, what they are often referring to is high economic growth. When they say things are going badly, talking about ‘recessions’ and ‘crises’, they are often talking about low or negative growth. A recession is officially defined as an economic period when GDP has been shrinking for at least half a year. So economic growth underlies everything from how the media speaks about the economy, to how governments measure the success of government policies.

So why is economic growth the ultimate aim of economics?

The idea is that, to use a ‘pie’ metaphor economists refer to quite often, economic growth increases the size of the national pie, which means there is more wealth and resources for everybody in society to fulfill their aspirations and tackle social issues. A bigger pie means more jobs, higher incomes, increased consumption and more money for the government to spend on things like the environment, education and health.

But does it really work like that?

One of the biggest debates is about whether economic growth actually makes us happier. Countries with a higher GDP tend to have on average higher life expectancy, adult literacy rates and political and civil liberties - some important indicators of well-being and quality of life. However this does not necessarily mean these benefits have been caused by economic growth - the causality could be running the other way. There are also other indicators of well being which probably go down as economic growth increases, such as air pollution, living space, direct access to nature and work stress.²

Then there is the problem of inequality. An economy might be growing but that doesn’t mean everyone gets to share the extra wealth equally. After the financial crisis in the US, in the first 3 years of the recovery, practically all the growth (95%) went to the richest 1% of the population.³

Finally, a lot of people question economic growth on environmental grounds. If we keep producing more, we might be growing our economies but we're also running the risk of damaging a planet with finite resources. More and more economists are now trying to work out how we can make growth sustainable, taking into account the limits of the environment and the need leave behind a sustainable economy for future generations.